The world of financial transactions is generally dominated by banks at almost every level, confining commercial activities of merchants and charging hefty transactional fees in a fashion that has grown largely electronic and automated. Merchants are charged to courier in fractional metallic currency, as they are charged to courier out fractional paper currency. Merchants are charged for wire transactions whether debited directly from a consumer account or through a credit system. In the end, merchant to consumer commerce pays a large fee not for the goods or services warehoused, advertised, delivered and exchanged, but for each transaction, deposit, withdrawal, electronic exchange, and physical currency exchange. Merchants cater to all levels of customers, from those who rely on credit or debit cards linked to bank accounts, through those that are, by choice or exclusion, relegated to the world of the so-called “unbanked” and “underbanked.”
The economic need and drive, shared by competitive merchants and consumers, to minimize transactional and banking expenses that add little to the quality of goods and services delivered but reduce profits and increase costs, has collided with the traditional notions of banking in this electronic era. The necessity to have “credit cards” for purchases, which carry the largest costs in fees to merchants and consumers alike, has given way to the use of debit cards in lieu of currency itself. While “good credit” and a banking history are both prerequisites to receiving a “credit card,” only a banking history is needed for the use of “debit cards.” Yet, debit card transactions carry bank-regulated transaction fees, and are generally not employable by the increasing number of so-called “unbanked” and “underbanked.” The “stored value card” has emerged as a transactional medium that crosses all socio-economic divides, is viable for the vast amount of consumer transactions, and carries few if any transactional fees typically associated with both credit and debit cards.
Additionally, driven by this changing marketplace and enhanced by the strides in computer technology, data communication and storage, banks and large-scale merchants can easily provide a whole panoply of overlapping transactional services, but are largely impeded by a system that appears to hold firmly to a legally-imposed banking monopoly, rooted in its original need to process tangible fractional currency, now appearing archaic to the objective technologist yet customary in the anthropological view of the human form of commercial exchange. The instant invention seeks to bridge the legal/technological/anthropological gap to provide a merchant-based venue, where the merchant hosts a plurality of commercial activities from the sale of goods and services through “virtual” banking, without the necessity to employ an institutional “bank” except where required, and in a manner that simply satisfies its basic need to increase its demand deposit account amounts and thereby increase its fractional reserve basis and lending ability in accordance with the fractional reserve system. Among the elements of import lie the enormous volume of merchant-related activities—from sale of goods and services, through check-cashing, bill payment, money orders, ATM functions, money transfers, credit cards, debit cards, gift cards and the like, and the impact upon the world of the “unbanked” or “underbanked.” In 2008, those who have no bank accounts (the “unbanked”) and those who may have access to some banking services yet do not generally use the same (the “underbanked”), together comprise, as one source reports, an estimated 73 million of 208 million income-earning American households (approximately 33.2% of all) relegated to living on the essential fringes of the banking world, but all central to the world of commercial transactions. (“The CFSI Underbanked Consumer Study Underbanked Consumer Overview & Market Segments Fact Sheet, Jun. 8, 2008, http://cfsinnovation.com/system/files/imported/managed_documents/underbankedconsumerstudy_factsheet.pdf; and “Highlights from the 3rd Annual Underbanked Financial Services Forum, New Approaches, New Understanding, New Relationships,” Berke, Sarah, Lopez-Fernandini, Alejandra, Herrmann, Michael J., CFSI 2008.) While the volume of money that passes through this class is large, it also comprises bulky physical fractional currency. Thus, banks cannot utilize such money (as it rarely navigates to demand deposit accounts but rather appears to be in “circulation”), and merchants must pay to cart the currency about, with little ability to actually grow such households into the world of “bankable” and transactions into the world of electronic. The numbers of members in this class rise, while the solution to blend this group into the traditional banking scenarios has heretofore remained unresolved. It is one of the objects of this invention to provide solution(s) to many of these myriad problems that fall within the rubric of legal structure. Lying behind this array of elements is a fairly well-established, yet unwieldy banking system, including fractional-reserve banking, which has been established over a multiplicity of years, but yearns to grow to meet these newly developing demands. These elements and solutions are explained and integrated herein.
For example, the traditional approach of banks courting savings customers has given way to another reported estimate, still sizeable, that 14% of U.S. income earners, as much as 28 million people, lack in bank accounts, with another 22%, or about 45 million people using banks intermittently. (“The FDIC National Survey of Banks' Efforts to Serve the Unbanked and Underbanked,” Dove Consultaing, December 2008, provided to the FDIC, http://www.fdic.gov/unbankedsurveys/.) Such “unbanked” or “underbanked” people nonetheless spend an estimated $11 billion in fees for some 324 million “alternative” financial transactions annually at check-cashing outlets, money-wire companies or other operations, all as reported by the Chicago-based Center for Financial Services Innovation (“CFSI”). Many banks are anxious to capture this customer base, but both customers and banks are concerned with risks inherent in becoming “banked.” Typically, such “unbanked” customers use a myriad of check-cashing facilities to liquidate their paychecks and then to use the cash thereby received. Banks and merchants are increasingly establishing facilities to handle these types of transactions, avoid or minimize the fees charged through card-based banking systems and check-cashing services, and make use of data obtained and/or mined therefrom. It is one of many objects of this invention to capture the transactions of these so-called “unbanked” and “underbanked” customers and to provide them with services and statements that are equivalent to, if not better than, those typically provided to the banked, without sacrificing any safeguards. Indeed, in an almost transparent attempt to utilize the enormous volume of sales activities and to avoid the costs of traditional credit card transactions, Wal-Mart sought an application to itself become a bank—an application withdrawn on or about Mar. 16, 2007 for reasons that may appear cloaked, yet, have become clearer. (“Wal-Mart Withdraws Industrial Banking Push, FDIC says retailer ‘made a wise choice’ not to pursue application for limited banking operations,” Kavilanz, Parija B., CNNMoney.com, senior writer, Mar. 16, 2007, http://money.cnn.com/2007/03/16/news/companies/walmart/index.htm.) Upon the heals of withdrawal of the banking application, Wal-Mart announced to its customer base a largely specialized array of services, by using GE Money Bank. Such services include financial services, services for the unbanked and underbanked and money centers. It is unclear the extent of the tie-in to GE Money Bank, although the advantages to all involved are clearly many.
The Office of Regional and Community Affairs of the Federal Reserve Bank of New York released a white paper in August of 2005 which generally indicates the issues confronting the merchant, involved in open and closed loop cards, and implicated under Regulation E (governance of electronic fund transactions, The Federal Reserve Board's Regulation E (12 C.F.R. Part 205) implements the Electronic Fund Transfer Act (15 U.S.C. §1693-1693r)). (“Stored Value Cards as a Method of Electronic Payment for Unbanked Customers,” Rhine, Sherrie L. W. and Su, Sabrina, http://www.newyorkfed.org/regional/Stored_Value_Card_Paper_August—2005.pdf.) One of the deeper concerns expressed therein is that the nature of stored value cards (“SVC's”) does not permit the consumer to create credit portfolios, resulting, at least in part, from the inability of SVC-based systems to render account statements and maintain transactional information. Indeed, one can well recognize that a simple SVC is but a magnetic sweep means and a code identifier—there is no mechanism by which a consumer who uses such an SVC can know card balance, let alone find and determine account activity, other than by manually maintaining such information externally (e.g., on paper). It is thus an object of the instant invention to satisfy the long felt need in the industry to provide a stored value-styled environment wherein a portable device provides the very equivalents of statements, transactions, histories and balances on demand to the consumer.
It should be further appreciated that whether open (multi-merchant) or closed (merchant-specific) loop, whether a single load or reloadable, the merchant who is afforded the capacity to provide a stored value-styled environment and statement equivalents, transactions, histories and balances to the consumer, also receives the ability to itself become a “sponsoring company,” maintaining that data in-house, while supervising/hosting the underlying commercial transactions. Many advantages are gained by further adding an optional interface with a financial institution. Indeed, in “one stop shops” like Wal-Mart, it is easy to recognize the significant value and commercial advantage of the inventive modality that enables the full gamut of customer services equivalent to that of a bank through a multiplicity of “stored value devices” (“SVD's”) that enable the execution of stored value-styled transactions and, in comparison to SVC's, enhanced by the provision of, inter alia, statement equivalents on demand offering the necessary predicates to satisfy traditional Regulation E requirements (to the extent applicable), permit the merchant to act as if it were a bank (a “virtual” bank) including, potentially, credit services, where the security for transactions is not necessarily the FDIC (which may consider this a “pass through” and which guarantees now up to $250 k per depositor per bank, Dodd-Frank Wall Street Reform and Consumer Protection Act, Jul. 21, 2010), but is, instead the merchant which can also often securitize a much greater amount. Furthermore, regulatory authority and limits are not fully clear, or even necessarily implicated, where a merchant acts in the capacity of a virtual bank in the provision of a certain panoply of services, perhaps greater in scope and security than an actual regulated bank. That having been stated, however, it is also observable that in such environments, the merchant may very well wish to be tied in with a bank (as Wal-Mart has done with GE Capital) in order to increase fractional-reserve banking opportunities.
It is thus an object of the present invention to provide a virtual banking environment in a merchant location and the option to the merchant of “banking” one or more of its transactions with a regulated banking institution to enable fractional-reserve banking, via a method, system and series of stored value type devices (“SVD's”) that provide a plurality of stored value-type services to the consumer while simultaneously giving statement equivalents, transactional information, histories and balances on demand. Indeed, one could well recognize that the instant invention renders the merchant a virtual bank—perhaps without regulation—permitting not just huge opportunity to the “unbanked” and “underbanked” consumer base, but even a potential intrusion into the world of the banked in a significant way, and, at minimum, but itself a maximum business opportunity, actions commensurate with those of a “sponsoring company.” Moreover, as shown, inasmuch as the method, system and devices of the instant invention provide “on demand” account information and tracking of all transactions, it is thus an object of the instant invention to enable merchant(s) to act as virtual banks not just targeting the unbanked and underbanked, but likewise viable for the banked.
By way of further background, it should be recognized that customers who are banked, unbanked and underbanked are all sought by the banking community. In the course of any given day, all customers utilize one or more of a composite of mechanisms to perform financial transactions: credit cards, debit cards, stored value cards, checks and cash. As a subclass of the stored value card, “gift cards” (which are “closed loop” and specific to a merchant or group of merchants) are used frequently, as shown by an industry that has arisen with some gathered 54,100,000 Internet sites (2008) offering such gift cards for purchase. Often, as well, merchants create cash checking and ATM scenarios just to take advantage of the marginal float associated therewith.
“Gift cards” are generally themselves a class of “stored value cards” which represent money that has been given to the card issuer for the acquisition of the card which often include not just a pre-determined amount of money to be used on the card, but a cost for the acquisition itself. Importantly, the “sale” of such stored value cards recognizes the revenue of the sale, offset by the liability of the card, resulting in a net of zero for tax and accounting purposes; taxes are incurred only when the card is actually used for commercial transactions. The inherent deferred tax consequences of revenue from sales of cards is itself a significant advantage to the merchant/sponsor, which the SVD's, method and system of the instant invention also capture.
Typical applications of SVC's include transit system cards, prepaid telephone cards, and merchant-specific cards. For example, transit system cards are acquired by passengers to eliminate the handling of money in connection with a transit ride (buses, subways, trains and the like). Of importance among transit system cards—like card usage in general—is the ability to accurately track usage, not just of the transit system, but individual profiles of the user. It is recognized that users are pattern-oriented: taking the same means of transportation at predetermined times daily and purchasing habits are predicable, making the data acquired in connection with card usage itself a valuable commodity. Predictability of the profiled customer usage also plays a key role herein in the advantages that can be obtained in a merchant-based virtual banking environment as well as for fractional-reserve banking, as discussed in greater detail below.
Fundamentally the only difference between a gift card and a stored value card is that the former is a closed loop system. Additionally, the stored value card is reloadable in the sense that additional money can be added thereto at any given time for an additional fee. Gift cards are usually of a predetermined amount provided by a specific merchant. In this sense, in the gift card process all activity remains captive within the specific merchant's environment in which the acquisition of the card has occurred. The broader category of stored value cards still has a predetermined amount—that amount having been provided in order to place the substantial equivalent value on the card—but the system is open in that the card is typically a card that can be used in any location that utilizes the specific card service. In the instant invention, it is the intent to provide the full gamut of services, not just those limited to stored value cards but a full, virtual banking environment, employing stored value devices “SVD's” that operate in conformity with the unregulated aspects of SVC's. In the preferred embodiment, it is the intent to provide an SVD that is like a gift card in the sense that it is a “closed loop” to a merchant or group of merchants acting as a “sponsoring company,” is purchased and optionally reloadable with fractional currency, and is part of a system that, when tied to a merchant's demand deposit account at a bank, serves to increase the asset base for fractional reserve banking while enabling a plurality of commercial transactions.
It is important to understand the background of the card industry and its history to recognize the costs associated with the transactions and the driving need by merchants to avoid paying those costs and instead “capture” the entire transaction without having to pay to the card systems employed a percentage-based expense associated with the transaction.
Since the 1980s, Visa U.S.A. (Visa) and MasterCard International (MasterCard), remained the bank-controlled credit card associations that together have accounted for approximately 70 percent of today's credit card market. Financial institutions, have been able to control the use of and access to their fee-based networks to the disadvantage to their merchant members. Recently, however, the credit card industry has been changing in that some merchants are now large enough to exert their own leverage (like Wal-Mart), legal defeats have impeded the ability of credit card associations to control the market, and some participants have developed new arrangements and alliances that may be a prelude to further changes in the industry.
By way of background, merchant credit has been available since virtually the birth of civilization. Yet, the present-day credit card industry in the United States originated in the nineteenth century. In the early 1800s, merchants and financial intermediaries provided credit for agricultural and durable goods, and by the early 1900s, major U.S. hotels and department stores issued paper identification cards to their most valued customers. When a customer presented such a card to a clerk at the issuing establishment, the customer's creditworthiness and status were instantly established. The cards enabled merchants to cement the loyalty of their top customers, and the cardholders benefited by being able to obtain goods and services using preestablished lines of credit. Generally these cards were useful only at one location or within a limited geographic area—an area where local merchants accepted competitors' cards as proof of a customer's creditworthiness.
In 1949, Diners Club established the first general-purpose charge card, enabling its cardholders to purchase goods and services from many different merchants in what soon became a nationwide network. The Diners Club card was meant for high-end customers and was designed to be used for entertainment and travel expenses. Diners Club charged merchants who accepted the card a 7% charge for each transaction. Merchants found that accepting Diners Club cards brought more customers who spent more freely. The Diners Club program proved successful, and in the following decade it spawned many imitators. Certainly, Diners Club created the fundamental notion of a closed loop card that could be used for purchase with merchants who had an established relationship with Diners Club—the issuer—and who paid the fee of 7% of all transactions for the right to accept the card. Each transaction was processed through Diners Club—with no intervening banks or other institutions—hence acting as a closed loop system.
Whether closed or open looped systems, it is well understood that the expansion upon this basic principle has resulted in a huge volume of merchant sales and payments of billions of dollars to the card providers for the “privilege” to accept the cards. Interestingly, the charge per purchase absorbed by the merchant is largely transparent to the customer, who pays the ticket price and tax, but has little to no idea that a significant percentage is paid by the merchant in connection with the transaction. Merchants are thus interested in minimizing the costs associated with accepting credit card transactions, thereby maximizing profits by minimizing the fees associated with such cards—another object of the instant invention.
The industry of charge cards grew from its birth with Diners Club in 1949. In the late 1950's, Bank of America, located on the West Coast, began the first general purpose credit card (as opposed to charge card) program. At that time, banking laws placed severe geographic restrictions on individual banks. Virtually no banks were able to operate across state lines, and additional restrictions existed within many states. Yet for a credit card program to be able to compete with Diners Club, a national presence was important. To increase the number of consumers carrying the card and to reach retailers outside of Bank of America's area of operation, therefore, other banks were given the opportunity to “license” Bank of America's credit card. At first Bank of America operated this network internally. As the network grew, the complexity of interchange—the movement of paper sales slips and settlement payments between member banks—became hard to manage. Furthermore, the more active bank licensees sought greater control over the network's policy making and operational implementation. To accommodate these needs, Bank of America syndicated its credit card operations into a separate entity that evolved into the Visa network of today.
In 1966, in the wake of Bank of America's success, a competing network of banks issuing a rival card was established which thereupon evolved over time into what is now the MasterCard network. In these scenarios, an “open” model is used, in that a bank that issues a card is not necessarily the bank that acquires the transaction. In particular, when a consumer purchases at a merchant, that merchant's banking relationship is considered the acquiring bank, which passes back through the Visa/MasterCard networks, back to the issuing bank—the bank that originally issued the card to the cardholder. Again, from the customer's vantage point, that the issuing bank is different from the acquiring bank (in that the merchant has a banking relationship with a bank other than the issuing bank) is transparent, yet the fees paid not just by the merchants but by the inter-banking systems become sizeable as the volume has increased enormously.
In addition, firms that were not constrained by interstate banking restrictions formed card networks on the single-issuer model (the model established by Diners Club, in which many merchants accept payments on a card with a single issuer and hence had a single relationship with the card provider and/or issuing bank.) For instance, the American Express Company introduced its charge card system in 1958, and Sears, Roebuck and Co. established the Discover Card credit card in 1986. Among the challenges each of these networks faced was bringing together large numbers of cardholders with large numbers of merchants who accepted the cards as payment. Achieving a sufficiently large network was hard, partly because merchants, especially larger retailers, were reluctant to honor credit cards that would compete with their own store-branded credit cards. Some smaller merchants, however, viewed general-purpose credit cards as a way to compete with larger merchants for customers. Merchants of all sizes have traditionally remained averse to having fees imposed on them by the credit card network.
Currently the U.S. credit card industry is a mature market. Today credit cards are widely held by consumers: in 2001 an estimated 76 percent of families had some type of credit card. Recent estimates suggest that among all households with incomes over $30,000, 92 percent hold at least one card, and the average for all households is 6.3 credit cards. Credit cards are also widely accepted by merchants, and with the recent addition of fast-food and convenience stores to the credit card networks, credit card payments are now processed at nearly all retail establishments.
The structure of the credit card industry is also noteworthy. As noted above, the general-purpose card market is dominated by Visa and MasterCard, two bank-controlled card associations. The four major card networks have a variety of corporate structures. Visa is a nonstock for-profit membership corporation that as of 2004 was owned by approximately 14,000 financial-institution members from around the world. Until 2003 MasterCard was a nonstock not-for-profit membership association, but then it converted to a private-share corporation known as MasterCard Inc., with the association's principal members becoming its shareholders. MasterCard has more than 23,000 members (including the members of MasterCard's debit network). The Board of Directors of Visa is elected by the member banks with voting rights based primarily on transaction volume. Control of the Visa and MasterCard card associations is roughly proportional to the transaction volume of member issuing banks. American Express is an independent financial services corporation, and Discover Financial Services is now a subsidiary of investment bank Morgan Stanley Dean Witter & Co. The issuance of credit cards is concentrated among the five banks, now narrowing with the acquisition of MBNA by Bank of America including its subsidiary MBNA America Bank, NA (MBNA), a monoline credit card bank, and Washington Mutual, Inc.'s acquisition of Providian Financial Corporation, including its Providian National Bank, another monoline credit card bank. As the conglomeration has occurred, so too has the consternation of the merchant population discussed further hereinbelow
In the industry today, debit cards are also quickly expanding as a product line. Debit transactions reached a record $15.6 billion in 2003. Debit cards are essentially cards that can be used either to directly withdraw cash from cash-dispensing equipment at banks (like ATM's), or can be used as ATM withdrawals at merchant locations, or as credit cards via Visa, MasterCard, or other networks. In the ATM scenario, the amount of a payment made using a debit card is immediately withdrawn from the cardholder's checking account, with the result that, for the card issuer, both the opportunity to earn interest on revolving balances and any inherent credit risk are eliminated. Likewise, when used as a credit card, despite the availability to have the money immediately withdrawn as an ATM-styled transaction, the credit card fee charged by the networks is immediately invoked. (Reasons behind the choice by the consumer are also explained hereinbelow, although the consequential costs are again born by the merchant and largely transparent to the customer.)
The ability to use the Visa and MasterCard networks to post debit transactions was developed in the 1970's, but not until the 1990's was there a significant volume of transactions in these systems. If a merchant has a personal identification number (PIN) entry keypad at its sales location, the transaction is routed like an ATM transaction. In the absence of a keypad, the merchant compels the customer to execute a credit-styled transaction authorization. These transactions then travel through the payment systems like a credit card transaction (except that the cardholder's bank will be informed of the transaction immediately and will be able to hold the customer's funds until settlement is completed).
It should be appreciated that many consumers opt out of the ATM-styled transaction to avoid having to enter their secret PIN number, despite the availability of the entry key pad. Inasmuch as the customer is left to pick without regard to the costs to the merchant, the differing fees charged to merchants for transacting PIN debits and signature debits has became the basis for conflict and resultant litigation.
Interchange fees are set by the card associations and in 2004 were a source of some $25 billion in revenue to card issuers. At the same time, interchange fees are a source of irritation to merchants and can be among the largest and largest-growing costs of doing business for many retailers. A standard interchange fee is around 200 basis points, plus $0.10 per transaction, but many transactions have lower fees and some have higher fees. Large merchants can negotiate directly with the card association for very low interchange fees, but these fees are not publicly circulated.
The pricing structure of interchange fees is complex. The specific interchange fee depends on the card association, the type and size of merchant, the type of card, and the type of transaction. Merchants that sell low-margin items—for example, convenience stores, supermarkets, and warehouse clubs—have lower rates. Hotels and car rental establishments have higher rates. Newer premium credit cards that offer more rewards have high rates. Credit card transactions have higher rates than signature debit card transactions, whose rates are higher than PIN debit card transactions. Sales transacted over the telephone or Internet have higher interchange rates, ostensibly to compensate for the greater risk of fraud associated with transactions that are not conducted in person. There is considerable friction among network participants over the issue of interchange fees, and card associations are being challenged on the structure and application of those fees. Merchants increasingly view interchange fees as an unnecessary and growing cost over which they have no control. Furthermore, banks are now issuing credit cards with even higher interchange fees. Merchants are unable to refuse transactions made with these cards. Therefore, merchants perceive issuing banks as earning revenue at their expense, with no added value to merchants. Merchants pass on the costs of interchange fees to their customers, who are largely unaware of this cost. Thus, it remains an object of the invention to enable commercial transactions between consumers and merchants without the use of physical currency—like that provided by credit and debit cards—but also without the fees and expenses charged for interchange.
Among other factors, the interchange fee structure that favors large merchants over smaller ones is inspiring merchants to challenge the interchange system more actively. Early in 2005, merchants formed a trade association for the purpose of changing interchange fees. In addition, Visa and MasterCard have been forced to defend the interchange arrangement from litigation filed in June 2005 by a group of smaller merchants.
Despite merchant discontent, card issuers have incentives to maintain or increase interchange fees. Issuers are marketing credit cards with reward or loyalty programs that encourage greater card use and reinforce customer loyalty to the brand. An estimated 12 to 24 percent of cards held by consumers have rewards associated with them, and in 2003 an estimated 60 percent of credit card spending was attributed to cards with rewards. Card issuers are funding these increasingly popular reward programs through interchange fees—another loop effectively financed by the merchants.
Thus, it is of no great surprise that merchants seek an alternative mechanism, whereby transactions can occur without the significant fees associated with the networks. To keep the transactions in a closed or even open loop environment, as described further herein, also creates a vast, untapped opportunity for fractional-reserve banking, also discussed hereinbelow. It is thus an additional object of the instant invention to provide such solutions.
It is important to understand the historical role of cash in all transactions as well. It is habitual to consumers that despite the availability of card-based options, quantities cash, defined herein as “physical, fractional currency” (i.e., paper and coinage) remains a primary vehicle for financial transactions. Daily, consumers withdraw cash or receive cash for purchases, whether the purchase is major or incidental.
Yet, as a result of historical underpinnings to such transactions (tax predominantly), the amounts of money involved in such commercial transactions rarely result in whole numbers, but rather include fractions of a dollar. Nor are such transactions rounded to the nearest paper value (like a dollar, for instance) but rather to the penney (one hundredth of a dollar), as the perception of the consumer and the legal structure defy any alternative. With pricing and taxing, the net sum for transactions is therefore rendered in fractions of a dollar. Indeed, even in the retail world of check cashing, rarely does the number reach a whole one, but invariably includes fractions of a dollar.
Thus, in virtually every commercial scenario, there is a residual, fractional portion of at least a dollar remaining from such transactions. In transactions where physical, fractional currency is due as “change” (coins or paper) to the consumer, or where cash is tendered to the merchant to initiate the purchase of goods or services, fractional metallic currency and fractional paper currency, together constituting “physical, fractional currency” is inevitably involved. Thereupon, the merchant must face the requirement of handling currency (and typically returning coinage), and the consumer must face the requirement of handling coinage and determining the best mechanism to utilize the same. Perhaps as a result of the bulk in carrying coinage about, or its perceived limited value (in comparison to paper money), or some other factor that renders the same a nuisance, carrying coinage is short term. The consumer generally seeks to disband the same.
One mechanism of disbanding of coinage is, e.g., a compulsory tip. In this manner, at the point of sale (“POS”), a consumer may simply say “keep the change” or present the change. While styled as a gracious gesture, the harsh reality is that the consumer would rather give away what appears to be trivial than face the nuisance associated with carrying the same. Of course, mathematically, calculating for that consumer the amount of money lost by avoiding the nuisance of change amounts to non-trivial amounts over time. Yet, this is but one option to avoid the necessity to handle metallic currency and determine where to place the same, or to carry the same.
Historically, the use of a “piggy bank” was predominately invoked as a curious form of non-institutional savings account (for which no interest is received). As the name connotes, the “piggy bank” was principally used by children as a means to teach conceptual savings and the individual valuations of the denominations of fractional metallic currency. Of course, such use for teaching is no longer necessary, as imitation “play”money is available, and children are trained to understand the fractional differences in currency quite rapidly. Thus, the juvenile teaching aspect of fractional metallic currency has truly become a relic of past memory, and not of present interest.
Moreover, as a result of the perceived substantial dissimilarity in value of individual coins (in comparison to large tranches of higher valued paper dollars), the perceived inconvenience of bulky currency has resulted in adults—not children—literally dumping their pockets at days end into containers (baskets, buckets, jars and the like), rarely to be seen or used by anyone again. All too often, jars are filled with coinage not because the consumer wishes a non-interest bearing savings account, but rather because the consumer wishes not to have the need to carry the bulk of coinage about. Industries have arisen that provide, for example, the ability—for a fee—to take such heavy and bulky containers filled with coinage to a location where the coinage is automatically sorted and paper currency (or chits) provided for conversion. Banks will accept coinage, but except for a rare few charge the customer for presenting the same. Even banks, as discussed in greater detail below, view coinage as a nuisance (while missing the point, pivotal to the subject invention, of the actual quantity of fractional metallic currency in circulation). Considering the heft of the containers and a cost for the transaction, one might determine that all those storage containers are not really worth the effort. Nonetheless, other than simply overtipping by the consumer in a transaction to avoid the receipt of fractional metallic currency (coinage) or simply giving the same away, of necessity the consumer will receive such heft, and routinely store it in some portion of the consumer's living space generally to be ignored for the future.
Antithetically, a number of devices still require the use of coinage for operation. For example, while “dropping a dime” in a telephone for a call has since changed in price, the concept of using coinage remains the same. Vending machines for the purchase of consumables or other items still require the use of coinage. Passive vending machines, like parking meters, tolls, admissions rights, municipal and private transit (trains, subways, buses, taxis and the like) all require some fraction of a dollar (“fractional currency”) which generally amounts to coinage. (Some “smart” vending machines permit the use of debit or credit cards, but the technical interface is difficult to humanize, and market entry has been limited. Hard currency still remains the predominant form for the same.)
Despite the fact that consumers routinely engage such vending devices during the course of any given day, based upon the habitual desire to avoid the perceived nuisance of change (generally heft, ringing in the pockets, and other forms of consumer concern), rather than having change handy, the consumer who faces such devices must now scurry to a vendor not for a purchase, but to provide coinage—change on the dollar. This, of course, creates a never-ending burden on, for example, a street vendor proximate to an array of parking meters, to keep a stock pile of coins for swapping for dollars—of zero net sum gain—or, in the alternative, to almost rudely deny the desperate requestor who has parked and is racing to avoid the ticket.
No matter the scenario, rarely does a day end with cash transactions “zeroing” out. Rather, the end result is that the consumer who initiates the day with no coinage (having dumped the change from the prior day in the family bin to avoid inconvenience) now completes the day with more coinage, which, in turn hits the same family bin. The situation escalates, in typical fashion. Rarely does the consumer actually prepare for the event, but rather, disturbingly, must face coinage at the time of the occurrence. Interestingly, despite the fact that the result of a failure to pay for, by way of example, a parking meter, results in a multiple dollar fine—which is in whole dollars and is typically paid by a mailed in check—such sanction is avoided only upon the necessity of the moment. As a result of the inherent nuisance of change, many a consumer will avoid the necessity for change-related behavior, or face the urgency of the moment if it occurs.
As shown by the foregoing, it has become known that consumers receive more coinage then they actually place back into commerce. For a further example, at the “register” in stores for typical commercial transactions, it should be noted that generally coinage is trucked in and given to the consumer. Reportedly, many retail stores (supermarkets, for example) have daily (and at times more frequently) delivery of coinage in all denominations. Such stores must track the rate of depletion of the plurality of forms of fractional metallic currency in order to predict the needs and avoid the confusion of having too much of one form of coinage and not enough of another. While paper currency leaves such stores in armored trucks to be transferred to a banking institution, coinage is actually routinely delivered to such retail stores as the paper is extracted. The need to provide fractional currency in commercial transactions—which is heretofore solely in the form of metal or paper—is a constant, nagging, expensive, repetitive problem to many retail establishments.
Likewise, at the merchant end, a plethora of other problems arise in connection with physical, fractional currency transactions. At many registers today, a composite of credit card, debit card, and cash are employed on both sides of many of the transactions (cash back, etc.). Interestingly, the debit card does not involve the same fees to the merchant as a credit card, since the credit card transaction involves a percentage (1-10% depending on the credit card and the rating of the merchant) lost by the merchant as a transaction cost, but that does not change much of the scenario. The merchant loses money based upon a credit transaction fee, while the card companies and underlying banks receive the percentage of the sale as the transaction fee itself. Indeed, this scenario has resulted in the National Retail Foundation reporting in or about 2008 a total membership sales volume of $4.7 trillion upon a membership of 1.4 million. Retailers who are members employ 23 million employees. Indeed, there is a reported lawsuit concerning unfair credit card usage charges to such merchant/retailers in a drive to reduce this mechanized approach—with limited value added—because of the huge loss in revenue to the merchant as a result thereof.
In this vein, as discussed, prepaid gift cards have become a predominant tool. Not only does the consumer have the ability to gift a finite amount to another, but the merchant has received the money for the card and the card is viable predominantly at the merchant's location (but occasionally elsewhere as well). Currently, gift cards predominate as a means to capture the sale both ways—acquisition of the card by paying therefor, and use thereafter. Even here, however, gift cards have a remaining balance (small as it may be) not easily recoverable to the consumer.
Returning to coinage, which still remains a predominant issue, while governments can (and do) repatriate paper currency in large and successful manners for a host of necessary reasons, the same cannot be said of fractional metallic currency. Observably, consumers “hoard” coinage not because they are numismatists (coin collectors, of which there are many but the total amount of money involved is small) but because they simply wish to avoid the nuisance associated therewith. Simply put, paper is lighter and worth more. Yet, the Department of the Treasury reported that the total value of all fractional metallic currency in circulation in 2007 alone was approximately a staggering $33.3 billion dollars, growing at a rate of about $900 million annually. Thus, the accumulation of coinage in total numbers is remarkable. Indeed, the sum total value of all paper currency in the form of $1, $5, and $10 bills in circulation is less than the value of metallic currency. Considering the disparate value between paper and coinage, the sheer bulk of such coinage is overwhelming, and the value staggering, heretofore beyond the control of the banking institutions, and adding expenses in the requirement of bulk-handling to the merchants.
It is thus an object of the instant invention to provide a system, method and devices that enable the minimization to elimination of fractional metallic currency, and physical, fractional currency itself, from transactions without forfeiture of the underlying value. Likewise, it is a further object of the instant invention to provide a platform for commercial transactions that receives physical, fractional currency and deposits the same in the federal reserve system, but does not thereafter pay out such currency, thereby increasing the fractional reserve basis.
In order to understand the subtlety of the instant invention, it is necessary to understand money, banking, and the concept of “fractional-reserve banking.”
Arguably, money was perhaps the most important historical advancement as a platform for human development and exchange of products and services. Money has been independently utilized at one time or another in each important civilization in the history of the world. There is also a remarkable similarity in the process by which money has evolved in different times in history and in different parts of the world.
Historically, money has typically evolved through three stages. In the first stage, money is comprised of a rare and inherently valuable material. The value of each denomination is related to the quantity of rare material contained therein. In the second stage, money is made of another material, such as paper, with no inherent value. In this stage, however, such other material can be exchanged into the rare material upon demand. In the third and final stage, money cannot be exchanged into anything physical, but its value is determined by law and custom, the “fair faith and credit” of the country of issuance.
Physical money has historically arisen as a means to facilitate trade. In most cases some form of metallic money has been used, but there are also other examples, where shells, or even large stones (on an isolated island) have been used as money. Oil was proposed as form of currency by the great Soros (and indeed is, at some level, used as a currency in and of itself). Gold and silver have predominated in the world as intrinsically valuable rare materials that can be easily rendered into denominations (contained pictures or other images of origin or pictorial images), but other metals have occasionally also been used. Bronze was the basis of the monetary system in early Roman times. Copper has also been used at times, for example in Spain and Sweden. In many cases, combinations have been used, with fixed exchange rates between different metals. Those fixed exchange rates have usually broken down as the relative value of the metals has moved due to changes in supply or demand.
Coins are the basis of almost every metallic monetary system. A coin in a physical money system is a piece of metal with a stamp. The stamp is a guarantee that the metallic weight and content is correct. Likewise, it is a mechanism to standardize coins of the same denomination as actually being of the same weight, caliber and value. While metallic coinage may appear trivial in the current climate, quality was historically important. Previously, metals had to be weighed in order to determine value, and that made trade more difficult.
In the United States, the third stage indicated above—where paper currency is no longer backed by the value of the underlying rare material—occurred, it is said, as a result of the abolition of the gold standard, often attributed to President Franklin Roosevelt in 1933. At this point was born the substitution of physical, fractional currency (coins and paper) by the Federal Reserve as the United States' “monetary standard” backed by the United States' full faith and credit. Some thirty years later, fractional metallic currency (coinage) followed suit, with the substitution of alloys for the traditional intrinsically valuable copper, silver and nickel originally used as the coinage material. Another crucial part of this process was the federal organization of the nation's banks through the creation of the Federal Reserve System in 1913.
Banking is an historical part of the economic system. During the Renaissance era, the Medicis in Italy and the Fuggers in Germany, were termed “bankers;” their banking, however, was not only private but also began at least as a legitimate, non-inflationary, and highly productive activity. Essentially, these can be termed “merchant-bankers,” as they started as prominent merchants. In the course of their trade, the merchants began to extend credit to their customers, and in the case of these great banking families, the credit or “banking” part of their operations eventually overshadowed their mercantile activities. These firms lent money out of their own profits and savings, and earned interest from the loans. Hence, they were channels for the productive investment of their own savings.
To the extent that banks lend their own savings, or mobilize the savings of others, their activities are productive. Even in our current commercial banking system, if a customer purchases a $10,000 CD (“certificate of deposit”) redeemable in six months, earning a certain fixed interest return, that customer is actually taking savings and lending it to the bank (in exchange for the CD which is a form of an “IOU”). The bank, in turn lends upon the money actually received in exchange for the CD at an interest rate higher than that being paid to the customer who purchased the CD. The difference between the higher rate to the debtor who received the loan, and the lower rate to the CD-holder who placed the cash, constitutes a portion of the bank's earnings. Indeed, in this manner, the bank has served the function of channeling savings into the hands of credit-worthy or productive borrowers.
The same is true of the great “investment banking” houses, which developed as industrial capitalism flowered in the nineteenth century. Investment bankers would take their own capital, or capital invested or loaned by others, to underwrite corporations gathering capital by selling securities to stockholders and creditors. The problem with the investment bankers is that one of their major fields of investment was the underwriting of government bonds, which plunged them hip-deep into politics, giving them a powerful incentive for pressuring and manipulating governments, so that taxes would be levied to pay off their and their clients' government bonds. Hence occurred the powerful and baleful political influence of investment bankers in the nineteenth and twentieth centuries: in particular, the Rothschilds in Western Europe, and Jay Cooke and the House of Morgan in the United States.
By the late nineteenth century, the Morgans took the lead in trying to pressure the U.S. government to cartelize industries they were interested in—first railroads and then manufacturing: to protect these industries from the winds of free competition, and to use the power of government to enable these industries to restrict production and raise prices.
Such investment bankers worked to cartelize commercial banks. To some extent, commercial bankers lend out their own capital and money acquired by CD's. But most commercial banking is “deposit banking” based upon a perception, which most depositors believe, that their money is “down at the bank,” ready to be redeemed in cash at any time. For example, if person X has a checking account of $1,000 at a local bank, X knows that this is a “demand deposit,” i.e., that the bank pledges to pay him $1,000 in cash, on demand, anytime he wishes to “get his money out.” Naturally, the X's are convinced that their money is safely there, in the bank, for them to take out at any time. Hence, they think of their checking account as equivalent to a warehouse receipt. (If one puts a chair in a warehouse before going on a trip, one expects to get the chair back whenever one presents the receipt.) Unfortunately, while banks depend on the warehouse perception, the fact is far more complicated. Indeed, the money is not actually there at the warehouse.
A warehouse ensures, as required, that the goods entrusted to its care are there, in its storeroom or vault. Deposit banks as the Banks of Amsterdam and Hamburg in the seventeenth century acted as warehouses and backed all of their receipts fully by the assets deposited, e.g., gold and silver. This deposit or “giro” banking is called “100 percent reserve” banking. Ever since, banks have habitually created warehouse receipts (originally bank notes and now deposits) less than 100 percent, out of a carefully constructed fractional-reserve banking system, meaning that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem. Currently, in the United States, this minimum fraction is fixed by the Federal Reserve System annually. Presently and historically this level has been at 10 percent.
To understand fractional-reserve banking, an example can be shown. “Y” invests $1,000 of cash in a bank 1. This amount is thus captive in the bank 1 subject to the terms of the investment. It pays out at a rate. This bank 1 then lends $10,000 to “W,” either for consumer spending or to invest in his business. The question arises: how can a bank lend more than it has received? The answer resides in the “fraction” in the fractional-reserve system. The bank simply opens a checking account of $10,000 for W. Why does W borrow from the bank? Well, for one thing, the bank charges a lower rate of interest than Y would have (and has more to lend). Since demand deposits at the bank function as equivalent to cash, the nation's money supply has just increased by $10,000.
Now, W spends the money he borrowed. Sooner or later, the money he spends, whether for a vacation, or for expanding his business, will be spent on the goods or services of clients of another bank 2. Bank 2 receives a check from bank 1 and applies the same to demand cash (captive) so that it can utilize the same for fractional-reserve lending. Obviously, if bank 1 defaults, this system could collapse.
Hence, without government support and enforcement, there would be only a limited scope for fractional-reserve banking. Banks could form cartels to prop each other up, but generally cartels on the market fail without government enforcement, without the government cracking down on competitors who insist on busting the cartel, in this case, forcing a run on competing banks, by having their customers demand a full pay out from their accounts.
Hence historically there was a drive by bankers to compel the government to control their industry. Central Banking began with the Bank of England in the 1690's, spread to the rest of the Western world in the eighteenth and nineteenth centuries, and finally was legislated in the United States via the Federal Reserve System of 1913, creating the Federal Reserve (the “Fed”).
In modern central banking, a “Central Bank” is the sole legal issuer of bank notes (originally written or printed warehouse receipts as opposed to the intangible receipts of bank deposits). This has evolved into issuance of national currency itself. If, therefore, X seeks to redeem $1,000 in cash from his checking bank, the bank draws down its own checking account with the Fed, effectively “buying” $1,000 of Federal Reserve Notes (the cash in the United States today) from the Fed. The Fed, in other words, acts as a bankers' bank. Banks keep checking deposits at the Fed and these deposits constitute their reserves, on which they can and do perform fractional-reserve banking at the average leverage of 10 to 1.
For further example, if the Fed determines that it is advisable to expand (i.e., inflate) the money supply, the Fed goes into the market (called the “open market”) and purchases an asset, including, e.g., corporate stocks, buildings, or foreign currency, but historically most predominantly, U.S. government securities.
For example, the Fed buys $10,000,000 of U.S. Treasury notes from Investment Banker, by check in exchange for $10,000,000 in U.S. securities. Investment Banker can do only one thing with the check: deposit it in its checking account at a commercial bank. The “money supply” of the country has already increased by $10,000,000; no one else's checking account has decreased at all. There has been a net increase of $10,000,000.
The commercial bank, in turn, deposits that check in its own account at the Fed, which now increases the reserve by $10,000,000, and lending ability to about $100,000,000 on the 10:1 ration. Stated another way, banks are obliged to keep 10% of what they have lent in a captive reserve base of demand deposit accounts. It should be observed that banks are regulated (like Regulations D and E) in the manner in which protections are provided, and collapse prevented.
Observably, this system makes banks highly competitive, seeking to increase their “captive” reserve in order to increase their fractional-reserve and ability to lend in the exponential process indicated above. In order to permit expansion of the reserve at banks, banks are constantly seeking depositors, those who wish to have their money captive by a bank (as in, e.g., a CD) which permits the reserve to increase and the leverage (of about 10:1) to be employed upon this money.
The meeting between the approximately $33 billion of fractional metallic currency—which is not materially included in any reserve—and the fractional-reserve banking system lies as part of the heart of the instant invention which provides a system, method and devices to collect and deposit fractional metallic currency (and indeed all physical, fractional currency) in demand deposit accounts—a sort of “one way street” to the federal reserve basis—while enabling the depositor to use the financial equivalent of that collected and deposited without forfeiture of value, free from the hassle of storing or carrying currency and free from bank supervision in every manner, for a myriad of commercial transactions, without costs and fees typically associated with credit and debit card transactions and with a complete, with a verified and personal “on-demand” balance and transaction history and no money “left behind.”
By way of background, the stored value card market, while huge in volume, also leaves fractional currency behind on the cards issued. Wal-Mart®, with sales of some $348.50 billion, employees of some 1.9 million people, and over 4000 U.S. locations, recently withdrew its application for a banking license, leaving it amongst banks, a multiplicity of credit cards (with billions of dollars in fees), check cashing facilities (where cash is the final product, thereby reducing the amount of money Wal-Mart has available), and an inability to control its own credit card which is, instead, through G.E. Money Bank, passed through the Discover wire network, with the concomitant fees. (Wal-Mart is also offering a vast array of other services to its customers which likely do not involve G.E. and tend to suggest Wal-Mart's incursion into the virtual banking environment. Yet, with that having been stated, even the concept of, let alone the specific formulae for, the instant invention and its inherent benefit to an entity like Wal-Mart which has indicated its preference to act as a virtual bank whenever possible, is an object of the instant invention.)
It is thus an object of the instant invention to provide a system whereby physical, fractional currency received from customers who purchase a device employed by the system of the current invention, is added to the merchant's captive demand deposit account with a federal reserve bank, and the merchant can then entertain commercial transactions within its venue. It should be appreciated that Wal-Mart has succeeded in its theme of a “one stop shop” where everything can be purchased (even grocery food), proving the attraction to consumers in not needing to shop anywhere else for virtually all goods sought and needed, from consumables through vehicles. It is thus an object of the instant invention to provide a system whereby a series of devices are purchased for, and reloadable with quantities of physical, fractional currency, the value is added to a virtual account maintained by the merchant, and the currency deposited with the merchant's federal reserve bank, such that the device is employable within the merchant's venue for a vast array of commercial transactions of the customers' choosing, including all purchases at its point-of-sale (“POS”) terminals, in lieu of existing gift cards, stored value cards, debit cards and credit cards. In this manner, the large-scale merchant can increase its attraction and sales to all consumers, offer specific enhanced advantage to the “unbanked” and “underbanked,” track consumer habits, collect fractional metallic currency (and all currency from circulation) and add the value of the same to its bank's demand deposit reserve as well as adding the value of the same to its total gross sales of goods and services, lower its fees and lower its costs, enabling better, less expensive, goods and services to be made more readily available to the consumer base, while directly enhancing the U.S. economy and lending ability.
Other objects of the instant invention will be shown hereinbelow.